State of dYdX Q1 2022 Analyst Call Transcript

If you would like to view the full recording of the live Crowdcast event, you can find it on our YouTube channel. You can also read the full Quarterly Report by Jerry Sun and Ashu Pareek here.

Participants:

• Jerry Sun - Research Analyst, Messari
• Ashu Pareek - Research Specialist, Messari
• David Gogel, Head of Growth & Operations, dYdX Foundation
• Corey Miller, Growth Lead, dYdX
• Vijay Chetty, Head of Business Development, dYdX Trading

Jerry Sun (00:04): The dYdX team, Corey, David, Vijay, why don't you guys introduce yourselves. Maybe share a little about how you got to the dYdX team and maybe like what you guys do for the organization. And then I can introduce Ashu and I towards the end and then we can go from there.

Vijay Chetty (00:39): Great, happy to kick things off from the dYdX trading side. So my name is Vijay Chetty, head of business development here. Been with the team just about two years now, based in San Francisco and I've been working on a range of things from institutional business development to growth efforts and marketing. And prior to that I was in the crypto space for about six or seven years. So previously Insurance Post and Ripple. And before that, I came from Wall Street at Blackrock. It's good to be with you guys. I'll head over to Corey.

Corey Miller (1:00): Great! Yeah so this is Corey Miller, the growth lead here at dYdX. I have also been here for about two years. I'd say I'm largely responsible for things such as new user acquisition and marketing. And prior to dYdX, I was also in crypto albeit more on the investing side of things. So, that was a fund called Block Tower Capital, for a couple of years. And then prior to that, I was at a seed stage venture capital fund. Okay to David!

David Gogel (1:36): Hey everyone, thanks for having me! My name is David Gogel. I'm the head of growth and operations at the dYdX foundation and based in Switzerland. I've been with the foundation for the last eight months or so now and focused on everything dYdX token, DAO governance related initiatives and before that I was on the growth team at dYdX trading for about a year. I have also been in the crypto space for about six years now in various roles in the investing world and then on the straight up ecosystem world in New York. Before that I got my MBA at Wharton Business School where I helped start the Penn Blockchain Club and was president of the fintech club. And then in a past life worked on Wall Street as a trader and then in M&A as well. Thanks for having me!

Jerry Sun (2:29): Awesome! Nice! Kind of diverse set of experiences and Penn Blockchain Club is very active in the crypto community so that's really cool. Question Vijay and Corey, you guys both are part of dYdX trading or dYdX? Just to clear up the different entities within the organization. There's the foundation and there's a trading side. Is there just dYdX or is that the same thing as trading?

Vijay Chetty (3:00): So dYdX trading is the US corporation behind the development of the protocol. That was a company founded by Antonio Juliano, the founder and CEO currently. And that's the team really working on the technology as well as the fully decentralized V4 version of the protocol that's upcoming. And the intent is really for that team to ship that and hand over control to the community from that point going forward. And likely continue to have a role around that decentralized ecosystem in some way assuming the community desires it and so that's really how we fit in. And then I'll let David speak more specifically to the foundation's role and how the foundation works with training but there's very much a separation of efforts there.

David Gogel (3:54): Right, so the dYdX foundation is a completely independent organization headquartered in Zug, Switzerland. We were founded in the middle of last year and the foundation is the entity responsible for issuing the dYdX token and driving the progressive decentralization over the dYdX protocol. So, we have a separate team, a separate board of directors and a shared vision and alignment with the dYdX trading team. But really a different scope of work. So we have employees and contractors all around the world and really focus on everything, DAO token and governance related.

Jerry Sun (4:49): All right! Well thank you guys for the introduction and also clearing the differences between the two. On our side, I'm Jerry and I got Ashu with me. He's also on the team. We're both research analysts on the Messari team. We wrote the state of dYdX Q1 2022 report. I've done a couple of others as well as done a couple of other calls. Sofor everyone here, we're excited to have you and I think we can kick things off and get started. Let me share my screen here and jump to. Can you guys see my screen? So I think just overall, a high level overview, I think the most important metric that we really covered in the report just from the quarter of dYdX is trading volume. At the end of the day, dYdX is an exchange. And so, users and trading volume are going to be the main metrics we want to look at to see the health of the organization and also in terms of some aspect of growth as well. And kind of in this sense, what we see is I think to be expected. Just taking a look at DEXs across the board, exchanges across the board, like Q1 kind of a pullback from Q4. I wrote about this in the report but just in general I think the crypto economy or the ecosystem as a whole went from about $3 trillion to $2 trillion. So a 50% pullback but if you look at trading volume for dYdX, a lot less of a pullback 23.8% or 24%. So I think in that sense it remains healthy and very active. Now, one of the questions I want to ask the two of you guys or the three of you guys on this call is there was a report from Max Holloway in Xenophon Labs and he's basically saying the trading volume of the protocol is heavily impacted by token price. How much do you guys consider that in terms of your rewards incentives program or just in terms of overall incentivization for trading volume?

David Gogel (7:31): Yeah so I'm happy to kick things off. So I guess just taking a step back right. So we launched the token and the governance contracts in July of 2021. So really that large inflection that you see from the left part of the chart to the right part of the chart is really the key catalyst for that is the token and the governance contracts which kicked off this process of decentralization for the community. And so collectively the team spent almost a year really thinking through token design, token economics and the different kinds of incentives that we were trying to drive from stakeholders in the ecosystem. And we think we built a robust ecosystem around governance rewards and staking, each of which design or were designed to drive growth and decentralization of the protocol. And so as part of that, there's two main ways to earn their token from a trading standpoint. The first is what we call the trading rewards and so that's really rewarding. Generally a combination of open interests and trading fees on the exchange and that really the largest pool of dYdX rewards is allocated to that rewards system. The second is what we call the liquidity provider rewards and so that's really trying to incentivize two-sided liquidity on the platform and rewarding a combination of factors, uptime depth, two-sided bid-ask spread and uptime on the platform as well as number of markets supported. And so that's really geared towards more professional market makers and liquidity providers who are providing liquidity to the exchange. And so both of those pools are really designed to reward both taker volume and maker volume which drive organic behavior on the exchange. There's two other kinds of ways to earn dYdX tokens. The first is through what we call the liquidity module and so this is a staking pool where stakers stake USDC and then community approved market makers borrow that capital risk-free to provide liquidity on the exchange. And then lastly there's the safety module where stakers can stake dYdX which acts as the ultimate backstop for the exchange and earn dYdX in return. And so those are the four different rewards and staking pools that we initially designed to distribute dYdX to various holders and participants within the ecosystem. There's also an allocation for a community treasury that vests monthly that funds various activities in the protocol like the dYdX grants program and then there was a very substantial retroactive rewards program that got tokens into the hands of past users of the protocol. To go back to your original question, how much do we look at token price, when thinking about these reward systems, the honest truth is we don't look at token price at all. We were very clear from day one that the current utility of the token is really around governance and really handing control of the token to our most active users on the protocol and allowing them to help shape the future of the protocol and have decision making power over many aspects of version three of their protocol and then all aspects of version four of their protocol which is slated to launch later this year. So at least internally we don't look at token price really ever. I think it's obviously probably pretty common for traders including a lot of the research that Max Holloway and team put together to try to come up with a dollar value for all of the rewards pools and staking pools that we came up with. And so I think over the last eight months or so, there's been about 130 million dYdX distributed which is a little more than 10% of the total supply of tokens to all of the rewards and staking pools that I mentioned. Obviously, the dYdX token price has been quite volatile but very much kind of trading in line with some other DeFi peers and so I think if you look at the current price of around $4 or $5, there's been about $500 million or so in value that has just been distributed to token holders over the last eight epochs or so. So those are just some metrics for framing but to go back to your question, we don't explicitly look at token price when thinking through these reward systems.

Jerry Sun (13:15): Right, I think that totally makes a lot of sense. One of the things covered at least you can notice from this transaction volume chart and one of the things covered in one of the discussions is the way the current incentives are set and I guess the reason I asked the question right is in a way using the token as incentives or rewards to reward traders like you talked about earlier and trading activity is one way that leads to growth of the protocol. So just focusing on the growth aspect, the way transaction volume is right now in the way I think the incentives are set, they are distributed right like every four weeks at the end of every epoch and I know there was some discussion about having maybe a more flat distribution. Maybe like whether it's distributed daily or just on a more granular level. Do you, from your guys' side and I don't know exactly kind of where that led but from your guys side, what are your thoughts on that versus kind of the current rewards incentive structures you have now?

Vijay Chetty (14:34): Yeah sure, happy to take that. So this was actually like really interesting instance where the community came together to really push forward a change that made a lot of economic sense for the protocol and community in exchange as a whole and had built on a lot of thinking that the dYdX team had done going into the launch of the incentives. And so I think for us it was really gratifying to see the community step up and take that ownership and leadership to really form an opinion around the trading rewards. And so just to summarize what happened. So Max, he started an organization called the Xenophon labs and he and his team have been actively looking at the dYdX protocol incentives and what they've found at a high level and there's lots of supporting research behind this that we're happy to share as well and that's available on the forums. But what they've found is that the epoch structure for rewards leads to late stage competition going into the end of each epoch where it pays for traders to basically essentially significantly ramp up their activity and take on a lot of open interest going into the end of the epoch in order to capture an outsized share of rewards. And the reason that happens is because reward value or expected value becomes more predictable as you hit the end of the epoch because rewards are claimable approximately seven days after the end of each epoch. So as a result there's much more predictability about what the actual economic value earned is and it makes sense for players to ramp up towards the end of the epoch and they do that primarily by taking on a lot of open interest. And so Max and team analyzed the incentive in great detail and looked at historical data, did back testing, came up with sort of the optimal strategy and what they found is really that it made sense to increase the weighting on the fee parameter of the trading rewards formula. So if you look at the formula, there's component probe and interest and component for the trading fees paid which obviously is geared towards those running heavy taker strategies that consume those higher taker fees. And so Max's hypothesis was that increasing the waiting on that would lead not only to a better and essentially more fair distribution rewards based on intended behavior, but would also be better for the the exchange overall and potentially reduce the sort of late stage competition that we see going to the end of the epoch by those who are trying to gain the rewards. So all in all, the hypothesis, our hope is that this change that's going through the governance process as we speak, will help to make those trading rewards more distributed and also lead less to that gamification behavior and sort of the late stages of the epoch so both from a market fairness as well as a market integrity standpoint, it's a change that there seems to be a lot of support around and the community is really rallying behind. So we're excited to see how the rewards distribution and the trading activity evolves as that gets implemented in the coming weeks. So that's on the trading rewards side and then there's also a separate liquidity provider rewards that David was alluding to that we can cover later as well.

Jerry Sun (17:54): And so when you talk about the trading rewards program, this is the one that I think there was a snapshot vote for or there was some kind of measure of interest a couple weeks back where among other things there would be more of a less of an emphasis on open interest and more of an emphasis on the fee structure aspect, right?

Vijay Chetty (18:22): Exactly yeah.

Jerry Sun (18:23): Okay, got you.

Vijay Chetty (18:27): And that snapshot has passed, so it's set to be implemented.

Jerry Sun (18:32): Right, and I think there was another aspect of that vote where another suggestion was to go and distribute dYdX rewards in USDC versus in the native dYdX token. Is that correct and are you guys kind of able to kind of speak to that aspect of things?

Vijay Chetty (18:54): Sure you want to speak that a bit, David?

David Gogel (18:58): Yeah I mean I think one of the most interesting aspects of governance is really people are debating all kind of proposals out in the open and so if you go to our forums and and specifically look at the thread that Jerry's mentioning, there's a lot of discussion around different ways to tweak the various formulas for either the trading rewards on one side or the LP rewards on the other. I think if you look specifically at the trading rewards thread there was one or two comments for people kind of promoting the idea that reward should be paid in USDC instead of the dYdX native token. I don't remember exactly how much traction that idea received but certainly I think like any idea proposed on the forums there's great ideas and then there's also just ideas that require further analysis. I think overall it's important to remember that these formulas are not static and the community really has the power to change the formulas as they wish. I think to be able to do that, people have to not only share ideas but provide thorough analysis and try to build consensus to get a snapshot vote passed, and then for certain decisions, an on-chain vote. So I think if you look at the quality and depth of research that Max Holloway put together for the trading rewards formula change which was really just limited in scope to increasing the weight parameter and then decreasing the open interest weight parameter, that was backed by a very extensive research proposal with all of the trade-offs and considerations for discussion and so ultimately that that's the proposal that passed. I think if we fast forward a year or five years from now, it's very likely that these formulas will continue to evolve as the best ideas surface to the top. The one Jerry that you mentioned I think has its merits but it's certainly something I encourage the community to continue to explore and debate and come up with a more concrete position on.

Jerry Sun (21:37): Got you, sweet! You guys also mentioned this second proposal and full disclosure to everyone here, I think this is a more recent proposal that was initiated in the forums but there was this kind of liquidity provider related proposal. I'm hoping is anyone able to kind of speak to that a little bit on the call? Maybe just share what it is and kind of why it was proposed?

Vijay Chetty (22:07): Yeah sure happy to do that. So this change relates to the liquidity provider rewards formula which as David was mentioning earlier is really targeted specifically at two-sided liquidity providers also known as market makers who provide liquidity in exchange. So obviously there's a lot of these types of players in crypto and they're some of the largest types of trading firms and capital markets firms in this space and so they can often serve this role where they stand as a willing buyer and seller for other users of the exchange and they also have proprietary arbitrage strategies that they run often in tandem with those market making strategies. And so this program is really geared towards that class of players and as David was mentioning in the initial formula design, we wanted to weigh the set of deterministic factors that really matters to successful exchange liquidity. Right and those can be quantified so there's the depth of how deep is the market, their spread of how tight is the market, uptime of how consistently is that liquidity available especially in periods of volatility and market drop-offs. And then there's a separate reward allocation for each market so the market maker is active in more markets and they stand to earn more rewards for running the same strategy. And this has proven to be quite successful in terms of encouraging like the initial liquidity of dYdX to the point that we've had more depth at tighter spreads than both FTX and Binance at most times in the market. So that's something that we found has been very effective in creating such an inviting environment for retail users to come in and trade and even large institutional firms who come in and trade seven or eight figures on a market buy or hedge or something like that. So it's really been valuable for us to take the exchange out to users and to non-US users and see a lot of value in it. Now that historically the payout of that rewards program, the LP rewards program has largely been concentrated to a handful of players who have really optimized their strategies for that rewards program. So as a result that's led to a lot of liquidity but especially deeper down in books a lot of that liquidity is often not getting crossed. So it's not essentially useful liquidity to the exchange environment. So that's issue one and issue two historically in recent months is that the rewards distribution itself has been fairly concentrated to these two or three players who really optimized for rewards. So for those two reasons, the community again rallied around this formula to basically research and analyze this series of changes. I think what was especially interesting about this latest snapshot proposal that's making its way to the forums as we speak is that it was the conclusion of collaboration among a number of key players in the ecosystem. So Max from Xenophon was heavily involved with this. Chaos Labs ran a comprehensive analysis and will continue to support the evolution of this formula and Wintermute who's a major market maker and one of the few that's actually been earning a bulk of the rewards, actually made the proposal and worked with those other two to kind of analyze it. And so we think it's really from our perspective as a team, which seems like quite a robust and well-developed conclusion that we also hypothesize has the potential to solve those aforementioned problems. So essentially really incentivize liquidity that's actually crossed and generating volume and then also to lead to support more equal rewards distribution among the players who are providing that utility to the exchange. And so in a nutshell the change is to basically add in a volume factor and overweight that volume factor in the formula such that players who are not only providing liquidity but doing it at the top of the book and therefore crossing a lot of volume will earn more rewards than somebody who just simply provides a lot of depth in the books. So we think this is a great step forward to basically incentivizing that more active useful liquidity and it'll also hopefully lead to more distribution among the many other market makers who have been ramping up strategies for this rewards program as well. And sort of in tandem with that change, the weighting distribution for the other factors, specifically depth and spread will go down and uptime continues to have an exponent of five just given how important that factor is for an exchange success. So this formula change for LP rewards is being captured in a snapshot as we speak and we're hopeful that it'll incentivize more market makers to come in and play on that side of things as well, along with just increasing the quality of liquidity on the exchange.

Jerry Sun (27:07): Got it. One of the things I think that's pretty interesting about what you said is you think about these large market makers that are already existing on the platform and they get a tremendous number of these rewards that you guys are distributing and they're actually the ones going and suggesting this implementation right? Am I understanding that correctly?

Vijay Chetty (27:32): That's right. So not in all cases. So for example for the trading rewards proposal, that was suggested by Max and his team. For the LP rewards proposal, that was proposed by Wintermute but in tandem with Max as well as Chaos Lab. So there's often a lot of conversation that happens on the forums or between two parties who are active in the community and that'll sort of lead to proposals being made. So from our perspective we're very excited to see that because that's really the vision we've always had which is that the stakeholders in this ecosystem, meaning the market makers, the proprietary firms and the traders who are most active, they're the ones who are also active in governance and that's sort of the flywheel that we've always intended to create. Not just on the institutional side but the retail side. So it's really great to see these market makers who have these active roles and large holdings really take advantage of that and put their voice on the forum. And I think what particularly stands out in this case is you had a market maker essentially actively acting against their own interest. One of you is one of the two or three who stand to gain the most from the status quo yet a desire to kind of create an overall successful environment for all market participants led them to propose this change. And I think that's just really a testament to the power of governance and sort of shared decision making because you wouldn't tend to see behavior like that in other venues, especially centralized ones. So it's really encouraging from my perspective at least.

Jerry Sun (29:06): Right that was the point I was going to make too. Just kind of clarifying that basically what you said is it sounds like Wintermute benefits a lot and the fact that they're going and being the ones to go and suggest this proposal in the first place is definitely very extraordinary and one of the aspects that's positive from community governance.

David Gogel (29:27): Yeah I think the only thing I would add is like there's a difference between kind of short-term benefit versus long-term benefit. I think even Wintermute, Calan and his post, refers to long-term sustainable growth of the protocol and I think Wintermute recognizes that a too heavy concentration of rewards in the hands of only a few market makers probably results in a worse outcome over the long run. So I think it's great to see Wintermute among many others have this longer term view of how do we build over the three to five year time horizon, the largest crypto exchange. And at times that means putting your individual interests at a loss at kind of the expense of growth of the overall protocol and growth of the overall ecosystem as a whole.

Jerry Sun (29:06): Right, that makes a ton of sense. I think just adding on to that one of the things I'm always kind of astounded by with dYdX is its ability to really compete with centralized exchanges. I wrote about this in the report when I was looking at volumes how dYdX has comparable volumes to a lot of other centralized exchanges in the space and so I can understand I guess from Wintermute’s perspective, it's kind of backing a decentralized player and hoping to continue to grow the ecosystem and seeing those long-term benefits pay out, not initially just kind of immediately taking all the rewards as they stand right now. Cool, great stuff. Ashu, I think we want to move a little to governance here. I think we're about halfway through the hour and I wanted to make sure that we have some time to kind of chat about some of these grant programs. Sorry, some of these grants that were funded, completed and kind of maybe what gets you guys excited about what's upcoming.

Ashu Pareek (31:32): Yeah so I'm just switching gears. I think the biggest sort of governance event over Q1 was the grants program, DIP-6. So if you just want to talk a little bit about that, what it is and then maybe tell us about some of the projects that have really impressed you, that really stand out so far and then what's ahead in the pipeline that you're really looking forward to or any of the RFPs, the request for proposals, that you're really eager to see filled, I think that would be great.

David Gogel (32:02): Awesome, yeah thanks for highlighting the dYdX grants program and DIP-6 which was definitely a major milestone I think for the community at large. I guess for those who aren't familiar, Reverie, which is a company kind of working on helping DAOs bootstrap from zero to one, is really kind of the mastermind behind the dYdX grants program. They ended up going through the governance process and getting, basically nearly unanimous support for about 750,000 dYdX to be used to fund the dYdX grants program. And so at the time, that was worth about $6 million or so to be used for grants and really represented one of the largest grants if not the largest grants program in all of DeFi. And so the grants program and kind of their mandate is really quite large. They've backed over 60 projects or so at this point and are active contributors that span everything from product development, marketing, education, international growth, and then kind of everything in between. And so overall I think it's been really great to see that project kick off and really deliver widespread funding to many active contributors in the ecosystem. I think just a few hours ago the dYdX grants program announced a wave 10, I believe, of funding and so that brings the total kind of dollar amount to, I want to say around $2.2 million or so allocated to 60 teams. And so really in just a few months the grants program has really been incredibly successful from my standpoint at bringing active contributors and long-term contributors to the ecosystem, many of which are building really important tools and research that drive kind of the protocol forward. I think the other kind of exciting development to maybe double click on a little before I share some of the grants that I'm personally excited about is really talking a little bit about the Guernsey purpose trust which was another DIP that was approved by the community and implemented by the dYdX grants program. Effectively this is pretty complicated but really innovative legal structuring that basically creates what's called a purpose trust structure in the Guernsey Islands and effectively converting the existing grants committee as well as the multisig into a legal wrapper which basically reduces the risk for all parties involved while increasing or while also kind of streamlining the operational on and off ramps with operating a DAO. And so there's a lot of benefits that kind of come along with the trust structure. The dYdX foundation published an open-source, a lot of research related to this, and I encourage all those interested to take a look. But the TLDR is that it does increase kind of the flexibility for the grants committee as well as multisig holders to be able to effectively operate the grants program while minimizing their personal liability but still kind of remain or retain the key aspects of community control and the community mandate that was entrusted in them by the snapshot vote. So both the establishment of the dYdX grants program and then the establishment of the Guernsey Trust, are both major milestones for the protocol and together have in my opinion resulted in a very successful grants program overall. So that's kind of the structure at a high level. The one thing, the last thing I'll add is again when grants requested funding, the dYdX token price was about double that at which it is today. I think the grants program in just a few months has already deployed close to two-thirds if not slightly more than that to fund all existing projects, and many of which are either paid in dYdX tokens, US-based applicants are paid in USDC. But I think we're definitely nearing kind of the last innings of dYdX grants version one and excited to see all of the lessons learned that the Reverie team has collected and, I know that they're starting to think through what does the next version of the grants program look like and how to scale that with future plans so that's kind of what happens behind the scenes with the grants program. But overall I think the Reverie team has done a great job and they're really the people and team kind of independently spearheading that overall project.

Jerry Sun (38:13): So what is the Reverie team's specific involvement? Like are they looking at applications, are they just kind of managing the inbound applications that come in or how does the foundation and Reverie kind of work together? Or what's the overall level of involvement from their end?

David Gogel (38:34): Yeah, so really the Reverie team is really the single party that manages dYdX grants. dYdX foundation, isn't involved. We help them kind of navigate the governance process but ultimately they're the ones who put together the proposal, submitted the snapshot and then once they receive the funds from the community treasury, have been working to operationalize that. And so I think my understanding of kind of their role is they, set up the dYdX grants website, they helped draft a lot of requests for proposals, they review applications and then they provide recommendations to the multisig, the owners of the multisig who were approved by the community to approve grants on almost a weekly basis. And so there's just a ton of operational work both on the reviewing of the application, setting up the trust structure and then coordinating payments to 60 plus teams, is a massive undertaking that I think the Reverie team has done a pretty phenomenal job at over the last few months. Here and then the grants program as well as various applicants do reach out to the dYdX foundation team and we do provide feedback, where appropriate but really the decision for funding is entirely led by the Reverie team and the multisig team and we really have no impact or decision making ability there whatsoever.

Jerry Sun (40:19): Do they provide updates for completed grants or things like that?

David Gogel (40:25): Yeah definitely. So they have the dYdX grants website which has a lot of information both in terms of the open RFPs which that list is updated relatively frequently as well as all funded grant applicants as well as all completed projects. And so the way that they've structured most of these projects is at 25% of proceeds up front and then 75% upon completion. We've already seen probably I want to say seven or eight projects that have been completed and those have been shared on social channels on twitter and then on the website and then a lot of teams are still working on kind of their various projects and once completed will be updated on the website. I do know the grants program did fund an RFP for someone to redesign the grants website and so I think a big part of their mandate is also to showcase all of the completed grants and make sure that all the users of the community have access to those and know what has been done and provide kind of transparency around funding and completion of grants more broadly. But that is overall an ongoing process.

Ashu Pareek (41:57): Got you.

David Gogel (42:00): Yeah, I think just maybe to follow up on the second part of the question which is, “Are there specific grants that have been completed that I'm personally excited about.” I would say overall I've been just really impressed by the number of applicants to the grants program. There's been over 60 that have been funded but probably several hundred applicants that have applied overall. I think some recent ones that get me really excited, there was the dYdX info Twitter account which launched maybe two or three weeks now and that's just a twitter bot that leverages API like the dYdX API and on-chain data and posts relatively frequently high-volume trades like stats around market volatility, new market listings and then other insights going on the protocol and sharing that programmatically on Twitter. I think that's really awesome to keep everyone abreast of the large trades that are going on dYdX and really creating that social loop for the community on Twitter. So that's one example that I was excited about. I think I've been really impressed by all of the research that Max Holloway and Chaos Labs have done and both of those individuals and groups were individually sourced via the dYdX grants program. And I think for anyone who has read their research and simulation analysis, I think that probably one of the best outcomes for the dYdX grants program is really to identify high value contributors and try to get them to help us think through and help the community think through these really complicated projects and then ultimately become, long-term service providers or contractors or employees for the DAO at large. And so I've been very encouraged to kind of see the quality of the research that continues to come out there. The other two that I'm really excited about that haven't been completed yet but have been funded, the first is a project called RabbitHole. And so the grants program funded a RabbitHole quest to basically provide funding for community members who complete certain steps and get activated on the dYdX protocol. So RabbitHole has funded a number of other quests but I would expect some form of request to be launched for dYdX where basically smaller holders can deposit funds on dYdX, do various actions and then get dYdX as a form of a reward for using the product. And I think that's really great from an education standpoint so yeah that's one that I'm particularly excited to see and then the last one is, maybe a fun one, a company or a product called Gather Town. Gather Town is kind of a Web3, online gaming space where basically community members can join. They can interact with each other in new ways through a mix of kind of a gaming interface and then video chat and we think from a community building hosting event standpoint, that's really a way for you to know community members who are spread out all around the world and can kind of interact in a more internet native way. But that's fun and different and so a team is currently designing a dYdX branded Gather Town space and we're excited to host community events and community AMAs in that format in the future. So yeah I think those are just some examples on my side. But overall really excited to see all the initiatives and projects that are getting shipped and worked on.

Ashu Pareek (46:35): Awesome! Thanks for going through all of that. And so now we kind of have like 15 minutes left. So just for the last 15 minutes, if you want to talk a little bit about what you've kind of alluded to earlier regarding dYdX V4. I think that was the really big announcement at the beginning of Q1, so if you can just tell us a little bit about that and then maybe any updates you might have since the initial announcement.

Corey Miller (47:08): Sure yeah, happy to talk a little bit about that. So yeah, so dYdX V4 is something that a lot of the team is currently working on. The goal here is to make dYdX V4 100% decentralized. And so what that really means is at the moment dYdX is kind of a hybrid decentralized exchange, so parts of the stack are still operated by dYdX trading, that being the order book and the matching engine. And so the goal here with V4 is to make that 100% decentralized, along with everything else in the tech stack and obviously that's a really hard technical challenge. The product experience that has made dYdX so popular and that our traders have come to expect is partly because we are somewhat centralized still and so when you want the performance that we have, it is quite challenging to do that in a way that of course is 100% decentralized. So with that being said it's a large technical undertaking and it's something that we've been working on for a little while now and something that we will continue to work on for the next six months or so. We are making quite a bit of progress on what we think will be a really fantastic product. Having said that, there's not too much to share quite yet. We are on track, I would say, to launch something by the end of the year here. But other than that, we're not really in a spot quite yet to share what the details will be. But it will be quite different than what it looks like today. We have been kind of going deep on a variety of, call it scaling methods here. Other Layer-twos and other Layer-ones, potentially creating our own layer one like all of these things are kind of on the table here and stuff that we are going deep on. But yeah having said that, there's not too much to share quite yet but I do think the product experience will be really good and it'll be something that all of our traders will be excited about and I think the token community at large will be extremely excited about it as well.

Ashu Pareek (49:40): Okay yeah great. I mean okay you said that you probably can't share too much, so I won't try to press too hard. Is there some way that the team is thinking about sort of on-chain scalability for the matching engine and the order book. Those have been kind of intractable problems so far so is there anything you can kind of expand on there?

Corey Miller (50:05): Yeah, I mean as everyone knows right, if you try to build something that's fully on-chain on something like Ethereum, you run into a lot of challenges which is why we were one of the first products to ever go onto a Layer-two, which is Starkware. I think we really proved that method could scale and at the end of the day, we made a really good product here. But as we look for the next stage of the protocol, although the current product is great, it doesn't really satisfy all the requirements that we have to really become fully decentralized and give all the control to the token holders. So with that we do believe there are ways to do on-chain order books in such a way that is exciting. Yeah, so again it's not something that we're ready to share quite yet but we are pretty optimistic that we will be able to get to a point that people are really excited to trade on the exchange, both for the users that are already on dYdX today, but also in the future. So making it easy and simple to kind of onboard the exchange in the future and in perpetuity and then also giving control to the community of token holders to kind of adjust the protocol as they see fit.

Ashu Pareek (51:29): Okay, yeah and then one other thing that really intrigued me in the announcement post was around this idea of permissionless market creation. I think that's sort of a huge sort of attraction for DeFi. That's a big promise of DeFi. So what or how do you think that's going to look in dYdX V4 or how is the team thinking about sort of creating the rails for that?

Corey Miller (51:57): Yeah, so maybe I could talk a little bit about how it works today and we can talk about what it might look like in the future. So today market creation is kind of like a two-step process. Number one, the asset has to be listed on the actual smart contracts so any new assets would have to go essentially to a token holder vote to theoretically add them to the dYdX smart contract. Right now, prior to the token launch, the dYdX team did kind of like include a set of tokens that did not need any sort of governance launch to launch on the exchange. And so that's kind of the basket of tokens that we've been working on to date. Every week we're kind of listing like one or two markets but for instance if any hot tokens were released since then and today call it like Apecoin or something like that, those are not on the smart contract so we would need the community to do a governance vote to add those. David could probably talk a little bit more about this but there are kind of some people here who are working on setting up a standard to add new tokens to the smart contracts. Now, I mentioned it's a two-step process so once they are on the smart contracts, it doesn't necessarily mean they would be added to the exchange. So as I mentioned before dYdX does have some centralized components and therefore we must abide by any regulations that we might be in all jurisdictions that we're in right. And so having said that we don't allow any equities to be added to the smart contract or to be added to the exchange rather. And so essentially what this means is anything that is added to the smart contract still has to go through some sort of legal review to be added to the product. In the future version of the product, yeah it'll likely be set up in a way that is permissionless. dYdX the trading entity itself, we will not have any affiliation with adding new markets. So that'll strictly be in the hands of token holders. It's possible like, it's kind of speculation right now about how this will work because I'd say we're still working on it but yeah depending on like who's operating the front end or something like that maybe you'll have access to some markets and not others but generally, the protocol will be set up in a way where we're removed from that process entirely and we cannot control what goes on the dYdX protocol in terms of assets. So it'll be the community to kind of come up with what they want to add, what risk parameters they want to have and perhaps any other methodologies they would want to add to the governance.

Ashu Pareek (54:55): Okay, yeah super interesting! Great. And then I think one question that I had and somebody had asked earlier in the chat was about distributing trading fees. So just how is the team or the community started thinking about how trading fees would be distributed in this model?

Corey Miller (55:13): Yeah it's a great question and something that again will be entirely up to the token holders. The one thing that we have said publicly is that dYdX trading will not take any trading fees and so what happens to those trading fees if anything is kind of up in the air still. I imagine that will be something that is a hot topic in the future for the community itself but again none of us on this call will have any influence there or any say in exactly what happens. It'll be quite an exciting time in my opinion, at least for the token holders to kind of come together and figure out a way forward.

Ashu Pareek (55:58): Yeah definitely, so I think that's it for my end. Jerry, I don't know if you have. You're on mute.

Jerry Sun (56:11): Sorry about that. I guess just to kind of tie things around at the very beginning, we kind of talked about the different entities within dYdX and we're on this topic of V4. Really, like how do you think that will change once V4 is implemented? Kind of like what is going to be the role of dYdX trading at that point. And I assumed like the foundation will still be around, kind of with its role within the community but I’m hoping you guys can kind of speak that a little bit.

Corey Miller (56:39): Yeah, so I guess on the trading side of things we'll still be very much involved in moving the protocol forward. As it relates to runway and things like that we've set up dYdX trading in such a way where we have enough runway for four or five plus years right now and so we very much intend to be fully involved with the protocol even after V4 is launched. Over the very long term, I think the foundation and the DAO will kind of be more involved with determining what the DAO wants to spend money on in terms of development and things like that. But that's kind of a little bit more down the line I would say. And the very near to midterm, dYdX trading will certainly be fully involved in aspects of the protocol that we feel we can have an impact on while still remaining not 100% involved in every single thing that happens. Right, so making sure that like we're doing things that the token holders are interested in us, doing things that we think will move the protocol forward but at the end of the day, not being in actual control of the actual smart contracts and the protocol entirely.

David Gogel (58:00): Yeah and from the foundation standpoint our objective is really to foster community-led growth development and self-sustainability of the overall DAO and community. We're a non-profit, we don't have a revenue model so at some point we will likely or definitively run out of funding and so for us like really our objective is really to accelerate the maturity of the dYdX DAO. And so by the time V4 is launched, we have the best in class DAO and best community possible to really be able to govern that successfully. So I think we've always expected to have a more limited kind of runway, we'll still be certainly around for a few years and we're definitely scaling the size of our team globally but I think there's a world where at some point we envision a lot of the resources and team members and partners that we're developing relationships with today, at some point we have all, we envision that, all of that will kind of fold into the dYdX DAO at large in a way that is kind of a step forward where it is really token and community member controlled from start to end.

Jerry Sun (59:39): Got you. Last couple of questions here just for the community, make sure we kind of just like to get to them here, “One of them is when is dYdX mobile app out of beta and do you guys have a timeline for that?”

Corey Miller (59:55): So the mobile app will be out of beta within basically the next week and a half or so. Yeah, it's a really exciting update. The beta itself has been going really well. We had over 200,000 people sign up for the waiting list here. We added roughly like 10,000 people which is the max we can add. Yeah like Apple's regulations there but yeah likely sometime next week, the mobile app will be kind of ready to go and yeah people will be able to fully experience this like the product that we've been heads down working on for a while.

Jerry Sun (1:00:34): Got you. Make sure we got everything here. One last question from Seth here, “It looks like when you put maker volume in LP reward, I think something like wrongful volume, are you wash trading? Might impact the reward? How will you plan to deal with it?”

Corey Miller (1:00:55): Yeah so wash trading is something that is arguably incentivized in some ways via these like various liquidity mining programs. Basically the way we have already and will in the future combat this is doing technical reviews and manual reviews of all the trades that happen on the platform and so basically throughout the epoch and specifically at the end of the epoch, we check for any suspicious activity that's ongoing and any traders that are identified as doing wash trading or any other source of the various activities, we disinclude them in the ability to have any like trading rewards from the epoch. And so yeah that is something that we actively monitor both internally and we use external providers as well to combat and so yeah we've done a good job of doing it today and I think if we do it like, if we make this upgrade in the liquidity provider rewards, a similar thing will happen as well where we will kind of just monitor it and punish anyone who basically violates those terms.

Jerry Sun (1:02:08): Awesome! Well I think we are a little past the hour here. I think we can kind of wrap it up here but appreciate you guys all for calling in, kind of answering some of these questions and taking these questions from the community as well. Yeah, thanks for joining here.

Corey Miller (1:02:27): Yeah, thanks for having us.

David Gogel (1:02:29): Yeah thank you guys

Jerry Sun (1:02:31): All right thank you guys, thanks everyone!

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